They have been, through these difficult economic times for the world's richest countries, some ports in the storm: emerging economies that have maintained their rapid growth rates through the global tumult, where the biggest problems have been not growth but inflation and the risks created by "hot money" flowing across the borders.
Now the hot money has gone cold. Suddenly, the problem facing India, and other giant emerging economies like Indonesia and Brazil, isn't so much the question of how to deal with gushes of cash crossing their borders, but rather of capital moving out and leaving behind a less valuable currency, higher borrowing costs and higher inflation in its wake.
In India, the rupee currency has fallen 15 percent against the dollar since the start of May, with a particularly sharp decline since the start of August. Investors have shed Indian government bonds, driving the nation's 10-year interest rate up to around 9 percent, from just over 7 percent in May. In Indonesia, interest rates rose by more like half a percent on Monday, to 5.75 percent, and its currency, the rupiah, is off 7.5 percent against the dollar this summer.
The question on the lips of economists and market mavens is this: Is it Ben Bernanke's fault?
Here's how the story goes: As the Federal Reserve has deployed trillions of newly created dollars to buy bonds, that money has had to go somewhere. With banks not seeing much demand for loans in the United States, the money has instead found its way into the global financial system, and in particular to buy higher-yielding bonds in emerging nations. If you are tired of earning a piddling 2 percent on your U.S. Treasury bonds, a rate pushed low by the fact that the Fed has been buying them, then making 5 percent on your money in Indonesian bonds or 7 percent from Indian bonds looks pretty good, even with the greater risk attached.
So a side effect of the Fed's efforts to stimulate the U.S. economy may well have been a gush of money into emerging economies with open capital accounts (which is the big thing that makes China different from the Indias and Indonesias of the world).
Now, of course, the Fed is starting to eye an end to its QE policies. It may well begin tapering the pace of new bond purchases less than a month from now, at its September policy meeting. If the economy evolves the way the central bank leaders expect it will, the Fed won't be buying new bonds at all at this time next year. Suddenly, whatever artificial boost that emerging market bonds and currencies have received from Fed policy will fade.
Traders appear to be trying to get ahead of that prediction, selling in droves in anticipation of the end of the Fed-spurred inflow of cash.
This analysis is widespread in financial markets. On one level, it defies economic theory. The Fed has telegraphed the tapering and eventual end of its QE policies with increasing specificity for months now, so you would expect, in a perfectly rational world, for currency and bond markets to have long ago priced in the plans of Bernanke & Co. The wild thing about the most recent bout of market volatility in the last few weeks is there's been no earth-shattering news about the prospects for the Fed tapering and then ending its bond purchases. Both U.S. economic data and comments out of senior officials have been broadly consistent with where they were a month ago.
That's a hint that, while the Fed withdrawal is part of the story, there's more to it than that. Rather, what is happening in emerging markets seems to be a classic tale of how markets can behave irrationally when there is panic in the air. The sell-off in the Indian rupee and Indian bonds leads interest rates up and sparks fear of what it will mean for the price of imported oil and other products in the world's second-most populous nation. That in turn sparks fears of political unrest and/or higher government budget deficits to contain the economic damage, which in turn make the rupee and Indian bonds even less attractive.
It is a difficult situation, and no one should envy Raghuram Rajan, India's new central banker. While it's overly simplistic to say "it's the Fed's fault," the whole thing shows that half a decade of monetary interventionism out of Washington really has created some dangerous ripples through the rest of the world.